CAT

Caterpillar Investors, You Need to Know This

We've been asking ourselves recently if the market has placed a fair valuation on Caterpillar. Let's dive into some of the fundamental values of this large-cap Industrials company to determine if there might be an opportunity here for value-minded investors.

Caterpillar Is Fairly Priced to Earnings but Overpriced Compared to Its Book Value:

Caterpillar Inc. manufactures and sells construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States and internationally. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 22.19 and an average price to book (P/B) ratio of 4.06. In contrast, Caterpillar has a trailing 12 month P/E ratio of 16.2 and a P/B ratio of 7.1.

P/E rations can be placed into context by dividing them by the firm's expected 5-year EPS growth rate, which gives us its Price to Earnings Growth (PEG) ratio. Caterpillar's PEG ratio is 1.09, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companies with excellent share performance have maintained much higher PEG ratios.

As always, a quantitative approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.

Overview of the Company's Finances:

2018 2019 2020 2021 2022 2023
Revenue (MM) $54,722 $53,800 $41,748 $50,971 $59,427 $66,587
Revenue Growth n/a -1.68% -22.4% 22.09% 16.59% 12.05%
Operating Margins 15% 15% 11% 16% 15% 18%
Net Margins 11% 11% 7% 13% 11% 14%
Net Income (MM) $6,148 $6,094 $3,003 $6,493 $6,705 $9,113
Net Interest Expense (MM) -$67 -$57 -$44 $1,814 $1,291 $890
Depreciation & Amort. (MM) $2,766 $2,577 $2,432 $2,352 $2,219 $2,157
Earnings Per Share $10.26 $10.74 $5.46 $11.83 $12.64 $17.64
EPS Growth n/a 4.68% -49.16% 116.67% 6.85% 39.56%
Diluted Shares (MM) 599 568 549 548 530 477
Free Cash Flow (MM) $5,282 $5,856 $5,349 $6,105 $6,470 $10,132
Capital Expenditures (MM) $1,276 $1,056 $978 $1,093 $1,296 $1,489
Current Ratio 1.37 1.47 1.53 1.46 1.39 1.45
Total Debt (MM) $36,193 $37,146 $35,556 $36,189 $35,497 $35,023

Caterpillar has weak revenue growth and increasing reinvestment in the business and positive EPS growth. Additionally, the company's financial statements display irregular cash flows and healthy leverage. Furthermore, Caterpillar has average net margins with a stable trend.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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